Purchasing Power Parity - Introduction, Meaning, Merits and Demerits

This ppt includes Purchasing Power Parity - Introduction, Meaning, Merits and Demerits

1. Presented by : Arpitha 2 nd M.com P urchasing Power Parity Theory Under the guidance of Sundar B. N. Asst. Prof. & Course Co-ordinator GFGCW, PG Studies in Commerce Holenarasipura

2. Content 1.introduction 2.meaning 3.key elements 4. Example 5.law one of price 6. Merits and Limitation 7.conclusion

3. Purchasing power parity theory which states that exchange Rates between currencies in equilibrium when their purchasing Power is the same in each of the two countries..... The basis for ppp is the law of one price. Introduction

4. Purchasing power parities are the rates of currency conversion That try to equalise the purchasing power of different currencies By eliminating the differences in price level between countries . Meaning

5. 1. currencies are used to for purchasing goods and services 2.value of a currency depends upon the quality of goods and Services that can be purchased by the currency 3.thus,value of money is its purchasing power 4.Exchange rate can also be mentioned on the Basis of This purchasing power 5.Exchange rate is the expression of one Currency in terms of another currency. Key elements

6. Example 1. suppose by using rs 60 we can purchase one kilogram orange The purchasing power of rupees can be expressed as Rs 60 =1kg orange . 2.Similarly for purchasing one kg orange ,we have to pay One dollar ,the purchasing power of dollar can be expressed as $ 1 =1kg orange 3.Now it is possible to state the exchange rates in terms of the Value of orange Rs 60=1kg orange =$ 1.

7. States the any commodity cannot command two different Prices in two different markets. If so profits can be taken by Trading between these two markets ultimately the difference Will set off the price differentail and prices of two markets Is equal. *ppp theory was proposed by david richardo 19 th century and popularized by gustav cassel in 1920 *According to this theory exchange rate of a commodity is determined On the basis of the purchasing power of currency . Law of one price

8. 1.There exist perfect market condition 2.absence of transportation costs from one market to another 3.free trade across the international market. 4.no barriers or controls over international trade like tariff, taxes , Incentives ,promotion etc.. 5.no country is strong enough to influence the exchange rate Assumptions of ppp theory

9. The absolute purchasing power parity theory predicts that Price level will be the same across countries ,reacll that The law of one price states that .the same products will Have the same price level everywhere ..... Basically, it predicts that the cost of living across countries Should be same. Absolute ppp theory

10. Relative purchasing power parity is an economic theory that states That exchange rates and inflation rates in two countries should Equal out over over time.relative ppp is an extension of absolute Ppp in that it is a dynamic (as opposed to static). Relative purchasing power parity theory

11. It is a theory according to which the interest rate differential between Two countries is equal to the differentail between the forword exchange Rate and spot Exchange rate. Interest rate purchasing power parity

12. The theory of purchasing power parity holds that the Prices of the same basket of goods should be the same In all countries ,differing only by the cost of transportation And any import duties The ppp exchange rate is the rate at which the currency Of one country would have to be converted in to that of another country To buy the same amount of goods and services . Conclusion

13. Http :www.slideshare.net. Https.:www.oecd.org Reference